The dilemma of Zimbabwe’s financial crisis: Here are the practicalities

 

By Lawrence Musekiwa

 

Zimbabwe has always been a ready example of mad inflation figures, and huge and shocking exchange rate volatility, all caused by increase in money supply.

What is evident in these interweaved problems is that the ordinary citizens of the country are the ones who are hugely, and repeatedly hit by economic hardships.

Surely the citizens of our full of ‘potential country’ are hit by high costs of living, destruction of savings and pensions, high stress levels due to uncertainty, and many problems in even buying basic goods like food, fuel and electricity.

Sure someone has to objectively analyze the national statistics.

Yes trade surpluses are good economic indicators, but if those surpluses are because the government is forgoing importation of vital goods like medicines and water treatment chemicals needed in the economy for the betterment of the citizenry then the use of these indicators is misguided.

The consumer price index is currently showing that we are galloping at 599% according to newspapers.

I recall going to town from Mt Pleasant for 50 bond cents earlier in the year. Yes sure it was in the 1:1  fallacy era.

Surely someone has to stop complaining about the printing of high denominated bond notes ceteris paribus.

This is because the currency have enormously depreciated from 1:1 against the USD to about 1:16.5 at the time of writing.

This means with the de-dollarization in process the economy needs more cash to facilitate the daily transactional needs in such an economy with high levels of consumption.

So the RBZ still needs to inject more hard liquidity into the economy whilst keeping their mandate of a stable exchange rate and low inflation rate.

What I am worried is about the increase in money supply despite low cash in the economy.

The RBZ said that they will replacing the RTGS balances with the physical bond notes that’s why they introduced more notes into the economy.

Was this actually done? But to everyone’s surprise the cash problem is still a day-to-day talk in the streets. There is a direct relationship between the increase of money supply and the depreciation of the local currency.

How to tame inflation

It is clear that what is making the ZWL depreciate is the increase in money supply.

Recently the government has been in a spree of issuing treasury bills. This obviously will increase the money supply in the future when they are repaid.

What’s more important is that the authorities should work on stabilizing the exchange rate by taking contracting the money supply.

By this the problem of inflation might be solved since there will be certainty since huge premiums are only passed from supplier to the customer.

All this can be overcome by a number of ways and one of them is increasing the production in the local economy.

Once production is revamped in the economy then the country can start to export for foreign currency.

Local companies should gain a competitive advantage of having a low value currency hence export more.

In the long run the local currency will find its way to stability since no currency can have value whilst there’s no production.

The central bank also should also be more transparent and even more be independent (members of the MPC).

This is because once there is no independence among the members of the monetary policy committee the problems of conflict of interests will sprout and this leads to disaster.

Written by Lawrence Musekiwa He is a student at University of Zimbabwe pursuing a degree in accounting. Email: lawrencemsekiwa110@gmail.com

 

 

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